Owning a small business is challenging on so many levels, but taxes seem to be a big stressor on the minds of most creatives. While talking taxes is never glamorous, getting to know the basics of tax can save you time and money down the road. Here is a small list of the things you should consider when you’re thinking about your taxes.
Understand Your Business
The first step in fulfilling your tax obligations is to understand what type of company you are running. Each type of business (Sole Proprietor, LLC, Partnership, Corporation, etc.) has its own unique tax implications and filing requirements. Spend a little time researching your options before you decide which one suits your needs best and will save you money in the long run.
Know What Type of Business You Run
Your tax requirements will always be dictated by the type of company you own. For our purposes we’ll focus on Sole Proprietors and Limited Liability Companies (LLCs), which are treated similarly as far as the IRS is concerned. Both are reported as part of the individual tax return that you would normally file every April.
You’ll need to fill out and include a Schedule C form with your return. It’s going to capture all of your income and deductions for your business, and luckily the IRS has tried to make it as simple as possible by providing helpful instructions on their website. (Link: https://www.irs.gov/pub/irs-pdf/i1040sc.pdf) This is where all of the record keeping you’ve been doing this year pays off!
Research Your State
You’ll also need to file a state tax return for your business. While every state is different, usually your state income tax return will roughly follow what you did on your federal return. Though the exact forms and deadlines vary from state to state, if your business is an LLC or sole proprietorship, your state will likely have a form similar to the federal Schedule C that you’ll attach as part of your individual return.
In addition to attaching the Schedule C form, you may need to pay self-employment taxes.
If you’ve ever been a salaried employee in Corporate America, you know that the paycheck you bring home at the end of the day is much smaller than what your employer offered you when you signed up. Part of that difference is the tax you have to pay to fund your portion of Social Security and Medicare. Self-employment tax is essentially doing the same thing, except as a small business owner, there’s no payroll department to take care of the details for you.
If the net earnings (revenue minus expenses) from your self-employment are $400 or more, you will owe self-employment tax. You will need to attach Schedule SE to your individual tax return. This schedule uses what you calculated on your Schedule C to determine the amount of self-employment tax you owe. Quarterly, you may need to submit Form 1040-ES that estimates the income and self-employment taxes you will owe at the end of the year. More info is always available on the IRS website. The good news is, half of the self-employment taxes you pay for yourself are deductible on your tax return!
Track Your Travel
While you may live in and operate your business out of one state, if you frequently travel to other states for business, you may need to file tax returns with those states. The best way to prepare for this is to track your travel.
Regularly Track Your Travel and Income
As an accountant, this is one of the areas that I see causing the most confusion. If you’re constantly on the go for work, and you find yourself in states other than your home state, the best thing to do is to track your travel. Make a note of the date, the time you spent there in hours, the amount of income received related to that travel, and the place (i.e. Philadelphia, PA) that you earned that income. At the end of the year you should be able to easily count up the number of days you worked in each location. Then you’ll need to do your research into each locality’s reporting requirements. While some states won’t require you to file a return there unless you worked for a week or more, others may require you to file if you worked there for as little as a day.
It’s tedious work, but staying organized up front is always easier than trying to recreate the wheel after the fact.
Remitting Sales Tax
For every sale you make, you will likely need to pay sales tax. Understanding where you need to pay, how much, and how often is the confusing part!
Know Where You Need to Pay
This sounds simple, but start by figuring out what municipality you are operating your business out of. For most small business owners with no other employees, this will be the city and state that you live and work in. In my case, I operate my business out Philadelphia and have to remit sales tax payments to Pennsylvania for the services I provide. I pay a total of 8% of my sales price (6% to the state of Pennsylvania and 2% to Philadelphia) but it’s all remitted to Pennsylvania and the state is then responsible for passing the local tax along. The state also dictates when I need to remit these taxes based on how much my estimated tax liability is, and the payments can range in frequency from monthly to semi-annually.
You’ll need to research how your state collects sales taxes, as they all have separate requirements. Many even require you to obtain a license to collect sales taxes.
Look for Exceptions
Not all states require you to collect and remit sales tax, but the majority still follow this model. Keep in mind that you only need to pay sales tax in the states you have a physical presence in. This means employees, an office, or other property such as inventory, etc. Sales alone do not count as a physical presence.
Also, do your research on the tax laws regarding the type of product or service you offer. Some states, for instance, don’t collect sales tax on clothing.
Products Versus Services
This may take some research on your part, but generally you will be taxed at the same sales tax rate regardless of whether you are selling goods or providing a service.
Look for Helpful Tools
Luckily for us, bookkeeping software is more sophisticated and easier to use than ever before. Quickbooks is owned by the same company as TurboTax and allows you the direct ability to translate your income and expenses into your tax returns as well as submitting your quarterly sales taxes for you. If you’re feeling uncomfortable with this aspect of your business or need to increase your efficiency, this might be a worthwhile solution. Like they say at TCC — automate it!
Seek Out Help
Small business taxes are confusing, even for the most seasoned professionals. If you feel like you’re floundering and need some help, ask a friend for the name of a Certified Public Accountant (CPA) who can help you figure out exactly what your filing obligations are. Find an accountant who you’re comfortable with, and who can answer all your questions. It’s important that they’re willing to take the time to explain these issues to you.
Try to see this as an opportunity to learn, rather than something scary or stressful! It's an important part of running a business, but it by following these steps, hopefully you'll start to feel like you've got a handle on your taxes.